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Two years ago, when the Fed released the transcripts from its 2012 FOMC sessions, we first disclosed several passages stated by then governor Jerome Powell which almost convinced us that the former Carlyle partner would not pursue the catastrophic bubble-bust policies that had been enacted by his predecessors. 

As a reminder, this is what Powell, who replaced Janet Powell as Fed chair in early 2018, said during the October 23-24, 2012 FOMC meeting – just one month after the Fed announced QE3:

I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.

First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?

And then the punchline:

[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.

Ah yes, the Fed’s “short volatility position” something which vol sellers over the past several years have grown to love and admire – occasional inverse VIX disasters like February 2018 notwithstanding.

But it was something that Powell said next that was an even more remarkable admission:

My third concern—and others have touched on it as well—is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.

…

When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month— it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market.

In retrospect, this observation by Powell turned out to be quite prophetic: after all, who can forget Powell’s “autopilot” comment on the Fed’s quantitative tightening, i.e., balance sheet unwind, which together with the Fed’s 2018 rate hikes, sent the S&P to a mini bear market when stocks tumbled in the last few months of 2018: “quite a dynamic response in the market” indeed, and one which forced Powell just days later to reverse on the Fed’s entire tightening policy and, several months later, to launch QE4.

Which, of course, is especially ironic in light of what Powell said next in the October 2012 FOMC meeting, which as we said earlier, almost gave us the impression that Powell was just the man to unwind a decade of capital misallocation even if meant the bursting of the biggest asset bubble in history:

I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.

Either year, one failed attempt at normalization and one QE4 NOT QE later launched by the very same Jerome Powell, and we can now safely scrap the “almost”: it is now without a doubt that the Fed is, as Powell said, “blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road” and that “investors really do understand now that we will be there to prevent serious losses.”

And they have Fed Chair Powell to thank for that, whose historic flipflop will be one for the history books when the asset bubble finally bursts. But until then, contrary to his now iconic warning, it was Powell who took it upon himself to make it very “easy” for investors to make money and the Fed’s only job is to make sure they “have every incentive to take more risk, and they are doing so.“

* * *

With all this in mind, let’s fast forward to the transcripts of the 2014 FOMC meetings, which the Fed declassified on Friday, and where we got some more delightful pearls of wisdom and warnings from the current Fed chair, who now appears hell bent to do absolutely every single thing he so prudently cautioned his colleagues he Fed should not do.

For the purpose of this article, we will focus on the transcript of the FOMC April 29-30 2014 meeting, which was remarkable in that it was the first one where the Fed extensively discussed the Fed’s rate “liftoff” policy which would, after several delays, finally took place in December 2015 when the Fed hiked by 25bps from the “zero bound”, and then proceeded to hike another eight times before eventually cutting rates three times in the summer of 2019 (with stocks at all time highs). Nested inside a lengthy discussion of Powell’s view of the mechanics of liftoff – which focused on his view of the floor vs corridor system and where Powell concluded that “an administered floor approach may be simpler and cheaper than a corridor with a market rate” – Powell made the following statement:

I kind of think that a large balance sheet might prove to be a magnet for trouble over time, and those two considerations pull me in opposite directions, I admit. So I tentatively land on a floor system with the smallest possible balance sheet. But that brings you to the really interesting question, I think, that Governor Tarullo and Governor Stein were all over, and that is the use of the balance sheet for financial-stability purposes. Very, very interesting questions, and I don’t have a lot to add on them here today, but I think those are the things we are going to be talking about for years to come.

Well he was right, because almost six years later, not only are we still talking about these “things”, but the use, and role, of the Fed’s balance sheet for financial-stability purposes, has never been more topical at a time when the Fed’s balance sheet has grown by over $100 billion per month in the past 4 months, allegedly to stabilize the repo market but in reality to unleash a historic market melt-up that has sent us to the highest, and most overvalued, S&P on record.

Amusingly, a little later in the same April 2014 meeting, Powell, a former private equity professional, shared some views from the perspective of a PE professional.

As long as we’re talking about private equity, I do keep in reasonably close touch with what’s going on out there. I would say that prices are high, leverage is high, and equity is low—in all cases, not as bad as it was in 2007. Prices might be in the mid-9s. We talked about leverage. Equity contributions are in the low 20s. So, again, not as bad as in 2007, but, in all cases, it’s getting stretched.

This was in 2014, six years ago. Anyway, back to Powell, and the following delightful snippet why a decade of covenant lite deals means the zombies will ravage the world for a much longer time than most expected:

The other really important difference is that rates are incredibly low. They swap out a lot of the floating-rate debt anyway at very low rates. You put all of this into the mix—I’m not at all sure that there’s a big wave of defaults being cooked up here because coverage ratios are pretty good. Certainly, the equity returns are under a lot of threat. But there are no covenants. It’s going to be really hard to default or fail to pay.

In response to this summary, former Richmond Fed president Jeffrey Lacker had the perfect laconic summary: “No dysfunction to worry about.” None whatsoever.

Which brings us to the punchline: Powell’s parting words from the April 2014 FOMC, which as in the case of Oct 2012, were delightfully prophetic:

I see financial conditions as a potential risk down the road. The risk of continued rising froth in fixed-income markets, followed by a correction that could halt progress, is a real one. If this starts to have the feel of a classic credit cycle, then the level of damage when the cycle turns is hard to predict.

To summarize, after years of warning about the potentially catastrophic consequences of a giant balance sheet, ultra low rates and super easy monetary policy, Powell – now in charge of the world’s most important central bank (as Trump’s twitter account reminded him every so often) – gazed into the abyss of tighter financial conditions, higher rates and a smaller balance sheet… and quickly did everything he himself had warned years ago against doing.

Oh, and speaking of the Fed’s “magnetic” balance sheet, 4 months after his face to face with the “abyss”, Powell managed to undo more than half of the Fed’s entire “normalization.”

Authored by Mary Rose Corkery via CampusReform.org,

University of California-Los Angeles professor made her views on climate change public in a recent op-ed, questioning American private homeownership in response to climate change, particularly California’s forest fires. 

Professor Kian Goah, assistant professor of urban planning at UCLA, whose expertise includes urban ecological design, spatial politics, and social mobilization in the issues of climate change and global urbanization, argued in an op-ed for The Nation that what makes the California forest fires even worse is urban planning. Its subtitle reads, “if we want to keep cities safe in the face of climate change, we need to seriously question the ideal of private homeownership.”

“Yes, climate change intensifies the fires—but the ways in which we plan and develop our cities makes them even more destructive. The growth of urban regions in the second half of the 20th century has been dominated by economic development, aspirations of homeownership, and belief in the importance of private property,” she writes.

Goah compared two ideas of thought: The American tradition of private property ownership and the collective property theories.

She suggesting the cause of the issue is private homeownership and advocated for “more collective” cities.

Some examples she cited for public housing were put in practice by Ilhan Omar, Alexandria Ocasio Cortez, and Bernie Sanders. Another solution would be cooperative housing, and community land trusts.

She argues that public housing would put more power into the federal government as opposed to the “Jeffersonian agrarian ideal.” The “Jeffersonian agrarian ideal”, cheap energy, and individual property “have created the scorching landscapes we see today.”

Goah concluded with how one should seriously question the American Dream with obtaining private property in the face of modern issues. 

“The ideals of the American Dream that have been instilled for more than 150 years will be difficult to dispel. Those deals have blinded us to other possibilities…

We need another kind of escape route—away from our ideologies of ownership and property, and toward more collective, healthy, and just cities.”

Campus Reform reached out to Goah but did not receive a response in time for publication. 

Just as Boeing’s departing CEO deployed his $62.2 million golden parachute last month as the 737 Max crisis persists, the first signs of supply chain problems for the Max was realized Friday when jet parts maker Spirit AeroSystems laid off thousands of employees, reported AP News.

The Wichita-based company announced 2,800 layoffs on Friday after Max production was halted this month, and the ungrounding of the aircraft remains unclear. 

News of the layoffs come a day after Boeing published internal emails showing employees mocking Federal Aviation Administration (FAA) investigators and ridiculing engineers for their incompetence on Max design. 

Spirit AeroSystems is the largest employer in Wichita and defines itself as a “significant supplier” to the Max program. 

At least 40 aerospace firms are based in Wichita that manufactures parts for the production of the 737 Max. The layoffs at Spirit could be an indication that the Max supply chain is coming under pressure.

“The difficult decision announced today is a necessary step given the uncertainty related to both the timing for resuming 737 MAX production and the overall production levels that can be expected following the production suspension,” Spirit AeroSystems CEO Tom Gentile said in a statement.

“We are taking these actions to balance the interests of all of our stakeholders as a result of the grounding of the 737 MAX, while also positioning Spirit to meet future demand,” Gentile added. 

The announcement of Spirit layoffs comes as manufacturing in the US continues to decelerate. Manufactures cut payrolls last month by 12,000, with concerns more job cuts could be seen in the weeks ahead. 

Affected Spirit employees will be paid for two months; the layoffs start on Jan. 22.

Sen. Jerry Moran, a Kansas Republican, said the disruption of Boeing’s supply chain will have “short-term impacts” on the economy. 

“The layoffs announced today [Friday] at Spirit AeroSystems have dealt a harsh blow not only to the company but also to Spirit suppliers and subcontractors,” Moran said. “I plan to continue working with the administration and Department of Defense to showcase the capabilities of Wichita manufacturers in an effort to diversify the industry and bring more job opportunities to the region.”

Economists from JPMorgan, Goldman, and Capital Economics recently said Boeing’s production cut could shave off up to 0.5% from the first quarter 2020 GDP. Boeing’s suppliers, such as Spirit, are already reeling from the uncertainty as layoffs are just starting. 

 

Submitted by Eric Peters, CIO of One River Asset Management

“I do solemnly swear that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; and that I will obey the orders of the President of the United States and the orders of the officers appointed over me, according to regulations and the Uniform Code of Military Justice. So help me God,” pledged the 2.7mm young, courageous American soldiers that our Commanders-in-Chief sent to Iraq and Afghanistan Since 2001. Over 6,900 of them died there. Over 52,000 have been wounded. Bush, Obama and Trump spent over $6 trillion. 480,000 Iraqis, Afghanis and Pakistanis died, half civilians. Millions were displaced. Who is accountable? What are the consequences?
 
Overall

“This airplane is designed by clowns who in turn are supervised by monkeys,” wrote one of Boeing’s employees, referring to their 737 Max. “I don’t know how to fix these things… it’s systemic. It’s culture. It’s the fact we have a senior leadership team that understands very little about the business and yet are driving us to certain objectives,” wrote another. “I still haven’t been forgiven by God for the covering up I did last year. Can’t do it one more time, the pearly gates will be closed,” wrote another. Boeing is our mightiest manufacturing exporter. A symbol of American greatness. Boeing’s board held the CEO accountable, fired him. The consequence for the catastrophe of his leadership? He walked away with $61mm in compensation.

Carlos Ghosn held an absurd press conference to clear his name, having fled Japan in box barely big enough to contain his greed and shamelessness. Set against Adam Neumann’s $1.7bln golden parachute, Ghosn perhaps believes Japanese consequences are overly harsh.

You see, accountability and consequences are both relative things. The less we hold ourselves accountable, the less accountable we become. And the lower the consequences we face, the more outraged we come to be when faced with the slightest consequence.

Not a single person was held accountable for the 2008 debacle. Nor for Iraq/Afghanistan. Earth’s sixth mass extinction is underway, Australia is burning, no global leader wants to seriously be held accountable, or suffer consequences. America least so. And the Fed led global central banks to accommodate all the above with easy money. Their policies turbocharged the inequality that poisons politics in ways more powerful than any elected official could have ever done. Are they ever held to account?

This all matters because we head into America’s election. It is sure to be the most vitriolic in generations. Who will we hold accountable? What will be the market consequences?

Red Lines

America can assassinate anyone, anywhere, at almost any time with limited collateral damage. Few of our adversaries can. With today’s technology, we surely would’ve killed Osama bin Laden in Tora Bora in 2001 along with the senior Taliban leaders harboring him. We might’ve saved $6trln and 500k lives. Given that the US has this capability, might we rewrite the rules and adopt an assassination policy? Holding our adversaries to account, imposing a capital consequence when their leaders cross our Red Lines? Soleimani apparently thought the answer was no. How will our adversaries act in the future if they know they’re thus accountable?

U.S. presidential candidate Michael Bloomberg told Reuters over the weekend that his “number one priority is to get rid of Donald Trump. I’m spending all my money to get rid of Trump.”

Bloomberg spoke to Reuters on his campaign bus as he toured a 300 mile stretch of Texas on Saturday. He made several campaign stops where he drew several hundred people in Austin and even fewer in San Antonio. Many of the folks who attended said they were independents and recovering Trump supporters who had learned about Bloomberg through his massive advertising campaign on television.

“He’s better than Trump,” said Marcelo Montemayor, 75, who attended a Bloomberg gathering at a Taco restaurant in San Antonio.

Montemayor told Reuters he voted for Trump but worried the president’s ultra-conservative appointees to federal courts could threaten abortion rights.

Former NYC Mayor Mike Bloomberg making his pitch to voters in Texas this weekend. He’s on a bus tour making stops in San Antonio, San Marcos, Austin, Waco, and Dallas. Follow @kellyfphares for more! pic.twitter.com/6Xob4fln6W

— Madeleine Rivera (@MRiveraFoxNews) January 11, 2020

Bloomberg’s media blitz has dominated television and radio across Texas and the nation in the last several months.

Mark Jones, a political expert at Houston’s Rice University, said Bloomberg had spent at least $15 million on ads in Texas through mid-January.

I am Obsessed with the spectacle of these Bloomberg Texas rallies

pic.twitter.com/k9gTWNcgoB

— wearing cowboy hat at Michael Bloomberg rally (@neoliberal_dad) January 12, 2020

Since Bloomberg officially declared his candidacy on Nov. 24, he has already spent more than $37 million on television ads. 

U.S. Senator Elizabeth Warren, a top Democratic presidential candidate, criticized Bloomberg for his media spending and said he’s trying to buy the election.

Among the Democratic candidates, Bloomberg ranks fifth in national public opinion polls, despite his massive ad spending that has dwarfed all other campaigns on both political aisles. 

Heading towards the National Football League championship, Bloomberg is expected to drop millions of dollars on a 60-second television ad to reach hundreds of millions of people.

“You can’t get to 330 million people by shaking hands. Television is still the magic medium,” Bloomberg said.

“If the Super Bowl wasn’t a place to get to an awful lot of people, they wouldn’t be charging a lot, or nobody would be paying it. This is capitalism at work,” he added.

Bloomberg is worth an estimated $58 billion, ranks 6th richest US person and 14th richest in the world. There’s no telling how much Bloomberg will spend ahead of the 2020 US presidential election.

Authored by Antony Sammeroff via The Mises Institute,

I’m sitting in the pub after a Skeptics Society meet up. I don’t go very often, but there was a famous author speaking, and living (as most of us do these days) in something of a social media bubble, this is a rare opportunity for me to actually get a window into what thinking people outside of my circle have to say on some of the issues of the day. A warm chat ensues over a pint with a couple of the other attendees, when miraculously the conversation at my table turns to the universal basic income (UBI). My neighbour gushes with vigour over its merits. He eagerly vows that it will solve innumerable problems facing our civilisation and I get the feeling he has been spreading the gospel at every available turn because this idea is the crucial one. If only he can get enough people to believe it…

I abstain from mentioning my book as I don’t want to prejudice his answers to any of my questions. I politely wait my turn, and then ask a simple question: “What do you think the potential disadvantages of the basic income would be, then?”

He replies, “There aren’t any.”

Trade-Offs Are Inescapable

Despite the heated disagreements between economists on just about every issue under the sun, there is probably one point that they are all actually unanimous on. That is the fact that every policy has winners and losers. Given that human wants are infinite but our means towards attaining those wants are limited, policies, by their nature, advantage some groups at the expense of others.

But the universal basic income seems unaffected. It’s going to cure poverty, eliminate stress, reduce crime, unleash entrepreneurship, emancipate women, save us from AI, and fight climate change. I’m not not exaggerating. I googled, and there are multiple articles claiming that, not only will the UBI save the economy from flatlining due to a lack of consumer demand by increasing consumption, but somehow also put a halt to global warming as well — contradictory as these two aims may seem.

Is the UBI is a flying unicorn that poops rainbows?

Perhaps so. Perhaps the laws of economics will be nullified around the good intentions of its advocates. Such is the strength and cavalier nature of the latter’s idealism.

Perhaps I’m being a little harsh on budding idealists, though. After all, this lad doesn’t have a background in economics, does he? He’s just looking for an easy way to save the world. Surely I should pick on someone my own size. Professional advocates of the UBI are bound to be more evenhanded in their consideration of the comparative advantages and disadvantages of the program and present a more nuanced view, aren’t they?

Well, not according to the titles of their books …

Rutger Bregman comes right out and calls his book advocating the UBI Utopia for Realists.

Annie Lowrey’s book Give People Money carries the subtitle “How a Universal Basic Income Would End Poverty, Revolutionize Work, and Remake the World.”

Andy Stern and Lee Kravitz’s book Raising the Floor carries a subtitle claiming the UBI will, “Renew Our Economy and Rebuild the American Dream.”

Phillipe Van Parijs and Yannick Vanderborght entitled their book Basic Income: A Radical Proposal for a Free Society and a Sane Economy.

This boundless idealism scares me.

The Russians were also offered utopia after the tsars, as were the Chinese when Mao came to power. So if I deviate from my so-far-ecumenical tone in this new coda, it’s in part because people seem to too readily forget what the road to hell is paved with.

Trusting the World’s Regimes to Do Good?

Most people agree that politics is a dirty game and that political powers will inevitably be used to further the agenda of officeholders and their cronies. That said, despite being immersed in the current thinking regarding UBI for three years now, I have seen precious little worrying as to what the government — or a future government — might actually do once it has seized control over everyone’s purse strings.

After all, these governments are composed of the same people who launched a permanent war in the Middle East, wasting trillions of dollars on destroying millions of lives. These governments bailed out the banks from the public purse and gave themselves raises after telling the rest of the nation we had to tighten our belts. They have robbed the young of the opportunity to own a home by sending house prices through the roof and mean to leave them a nation in ruinous debt. They continue locking away huge numbers of people for decades for victimless crimes, leaving their children to be raised single-handed. They created an oligopoly of higher education provision forcing generations into student debt that cannot be defaulted on, and healthcare systems that are so restrictive that people must pay inordinate sums to get care or are otherwise forced onto government waiting lists so long that many of their conditions are chronic or untreatable before they are seen to.

Am I the only one who thinks these powers may be used for evil rather than good?

China’s “Credit System”

One such cautionary tale may be found in China.

If we take a look across to China, where they are instituting a “social credit system,” we might glean some insight into what may be in store for us with the UBI.

Under the Chinese social credit system the government judges their citizens’ behaviour and trustworthiness in order to assign each person a rating out of one thousand which the state can then improve or dock. If people play their music too loud, don’t pay a court bill, owe the government money, or are caught jaywalking, for example, they can lose certain rights, such as booking flights or train tickets. The government can have an individual’s internet speed throttled, or exclude a person from getting the best jobs. Parents can have their children banned from the best schools, be excluded from the best hotels, be publicly named and shamed as “bad citizens,” and even have the family dog taken away.

Now a basic income guarantee may begin universal, but as the years wear on and it proves expensive to provide, it might be that corners have to be cut in order to ensure its continued fungibility. Hardly anyone will object to the UBI being withdrawn from criminals, for example. And then perhaps for antisocial behaviour. People may have their universal basic income docked for committing petty crimes like littering the street. A few might moan that this is the beginning of a government social engineering program, but to most people this will seem like a quite a sensible and reasonable measure. After all, we all “benefit” from the benevolence of society providing our roads and schools, and now our basic income. So if some choose to repay society in disrespect, with such vulgar behaviour as littering, throwing away the ends of cigarettes, spitting on the street, failing to remove their dog foul, or what have you, why should society continue to furnish them with the fullness of a basic income? Besides, if their basic income is docked for several months they are unlikely to repeat the crime — they will soon learn their lesson. It will save money on law enforcement, lengthy court trials, and prison sentences as well, all of which are costly. Clipping people’s basic income will soon seem the most sensible and appropriate response to many crimes and misdemeanours. People may be sanctioned for things like not sorting out their recycling. After all, the government provides garbage disposal for us, and the environment is at stake. Governments are already looking at sanctioning people for this kind of behaviour, so the step would not be much of a leap. These steps will simply be designed to acclimatize people to the idea of being “nudged” in the right direction before more radical measures are taken to use the UBI to shape their behaviour.

In China people can have their social credit score docked for buying too many videogames. Under the UBI, there are bound to be complaints that some people are taking advantage of the system but are not contributing, and that that is bad for them as well as for society. It will therefore seem sensible to save money, and encourage people into better habits, by docking their universal basic income if they spend too much time playing on the computer, on clicking around on social media. The government will likely have many bright ideas as to what kind of activities they should be getting up to instead. They may soon also want to reward people for good behaviour, like contributing to charity or volunteering. But how long can such a system remain impartial? How long before people start creating malignant causes to launder and take advantage of free government money? How long before the government starts to select which causes are worthy and which are not? The government rewarding specific activities with public funds supplants the market system with a “bribocracy” where people can climb the ladder not by directly providing goods and services that others are willing to pay for, but by finding out what the government approves of and collecting brownie points. If spying on neighbors and reporting their so-called antisocial behaviour qualifies, then the government will have found a role for the new class of sycophants — the idea becomes all the scarier. It would not be the first time governments have called upon their citizens to tell on their neighbor.

In China people can have their social credit score docked for posting fake news online. We may, of course, ask, fake according to whom? After all, the Chinese government maintains that the Tienanmen Square Massacre of 1989 was “fake news” drummed up by the West to undermine the regime. Closer to home, the mainstream media was entirely complicit in selling the war on Iraq to the public, but I very much doubt we will see people being sanctioned for posting news from mainstream sources such as the BBC or MSNBC. Our leaders are above falsifying our historic records and sending embarrassing incidents down the memory hole for permanent deletion. The purse strings of the universal basic income also present a grave threat to freedom of speech. Anyone who has been following the “woke wars” on Twitter and other social media platforms will have heard of people receiving lifetime bans for tweeting things like “Men are never women.” Now whether you believe such a message is transphobic or otherwise, you may at least believe that someone has the right to tweet it, and be duly educated as to the wrongs of their action by other users. The universal basic income could easily become the new weapon to wield against those who hold unpopular opinions or those that are simply no longer politically correct. It will be first used to strike against unpopular groups such as racists, misogynists, homophobes, and bigots. Not many people will come to their defense when they lose their basic income for spreading hate. But one day you yourself may hold an unpopular opinion that is relatively benign. Maybe you will say that people shouldn’t have their basic income docked just because they say unpopular things on the internet. You will not just be slapped with a Twitter ban, you will potentially lose $1000 a month.

Conservative Charles Murray states in Losing Ground, his book advocating the UBI, that it would require people to have a “universal passport” and “known bank account.” I don’t think it’s unrealistic to imagine that people may soon be forced to accept a mandatory government ID card in order to claim their basic income. Before long they will be asked to show it in order to get into venues and government buildings. Then at the airport to get on a plane. Then simply to board a train or a bus. Then to get into a bar. Then to get into a restaurant. Then show it to any policeman who asks to see it. Before long, every public place we go we’ll be asked to show our ID card. Failure to produce it may result in a penalty to our UBI. You will need to show your ID card in order to vote, and before long not voting may result in a penalty to your UBI as well. In a time of war you will be asked to enlist in the military or risk losing your UBI for denying your patriotic duty. Just as states freeze the assets of suspected fraudsters, they will soon be freezing the “known bank accounts” of political dissidents. By the time they come for those with radical ideas about freedom from government tyranny there will be precious few left to speak out for us.

Far from creating a futuristic utopia where — once our security needs are met — we are all liberated to pursue our dreams, become great scientists, scholars, artists, and entrepreneurs, the universal basic income threatens a totalitarian horror the likes of which we are used to seeing imagined only on The Twilight Zone and The Outer Limits.

Certainly the poor, who depend solely on their handouts to survive, will quickly become very cautious of what they say and do, but even reasonably affluent people will think twice before risking a sum that is high enough to live on. The UBI will institutionalise the state as each of our patrons — and us as wards of the state. Once this relationship is established we will enter into a frightening era where the government is our provider and the UBI can easily be weaponized by our rulers to shape us into compliance.

A former US marine who was dishonorably discharged a decade ago for “serious offenses” was busted last week for posing as a member of President Trump’s security team in a bid to get near Marine One – the president’s helicopter.

37-year-old Brandon M. Magnan of Naples, FL – a registered sex offender – was driving a Honda Pilot with an unidentified male passenger around 3pm on January 5, when he bluffed his way through two security checkpoints using falsified credentials bearing the seals of the Marines and the Marine Corps Executive Flight Detachment, according to the New York Times.

Magnan was attempting to breach protective zone established around Atlantic Aviation – which provides hangar space, jet fuel and flight support services – ahead of President Trump’s planned departure from Palm Beach to Washington.

It wasn’t clear why Mr. Magnan was trying to get near the helicopter. Marine One, which is piloted and protected by the Marine Corps unit known as HMX-1, is used to transport the president for shorter trips, the Secret Service said.

Mr. Trump was spending his winter vacation in Palm Beach, Fla., at his private Mar-a-Lago resort at the time of the episode with Mr. Magnan. –NYT

Magnan was charged January 6 for impersonating an officer or employee of the United States, according to a criminal complaint filed by the Secret Service. The former marine – who was dishonorably discharged after being convicted at a court-martial for “serious offenses” – was spotted by a Sheriff’s deputy who noticed that he was not wearing a Marine Corps uniform, as is standard during presidential travel.

The deputy contacted Trump’s actual security detail, who identified Magnan’s credentials as fake. When he was confronted by law enforcement, he said that he was a retired member of HMX-1, the official designation for Marine One.

Mr. Magnan is listed in the Florida Department of Law Enforcement Sex Offender registry for convictions in 2010 in military court related to abusive sexual conduct and sodomy.

In one case, a lance corporal testified that he fell asleep in a hotel room with Mr. Magnan after the Marine Corps ball and awoke to find Mr. Magnan’s hand in his pants and over his boxer shorts, according to military court records.

Mr. Magnan was released on a $100,000 bond, according to court records. –NYT

If convicted for the security breach, Magnan faces a maximum of three years in prison and a fine of $250,000 as well as a year of supervised release. A hearing is scheduled for January 27.

 

Authored by Morgan Stanley’s chief equity strategist, Michael Wilson

The Other 1 Percenters

Income inequality has become a hot topic. The top 20% has done exceptionally well over the past several decades, while the average American has not kept pace. Though this is a political issue, it’s also an economic one. As legend has it, Henry Ford paid his workers more so they could afford to buy his cars. Whether that was his real goal or it was just PR, paying employees a better wage is good for the economy, if not the bottom line.

American workers did pretty well during the second half of the 20th century with regard to getting their fair share. Based on the National Income and Products Accounts, employee compensation as a percentage of Gross Value Added held fairly steady between 61% and 65%. But after 2001 that all changed, and labor’s share began to drop until it reached below 57% in 2012.

What happened? While I wouldn’t attribute all of the decline to just one factor, a big driver was globalization. Companies also faced increasing pressure to be more efficient in a world of deflationary pressures. Since 2012, employee compensation has climbed back the the low end of the old range. As the economy recovered from the financial crisis, labor markets tightened and workers have gotten more of the pie. But we’ve also seen a backlash against globalization and further outsourcing. This reaction has resulted in legislation to increase the minimum wage by 20-50% in many states, with inflation-indexed increases in the future.

We have written a great deal about the rise in labor costs over the past year and the negative impact on corporate margins. In fact, this is the primary reason why earnings growth in 2019 was negative for most US companies while the economy enjoyed another strong year of growth driven by, you guessed it, the consumer. In fact, this shift of profits from capital to labor has led to an unbalanced economy in which consumption boomed in 2019 but capital investment growth actually went negative in the second half of the year.

The bottom line is that the average worker is doing well, thanks in part to the higher ratio of corporate earnings coming their way and a tax cut that benefited the middle class more than the rich, given the $10,000 limitation on real estate and state income tax deductions. Generally speaking, this is a good-news story that suggests we are in the process of dealing with income inequality, even if it’s long overdue and may be happening too slowly.

There’s another form of inequality – corporate – that is much less appreciated.

In a world of low growth, limited pricing power and now rising costs, it’s clear that bigger is better and scale matters. This is also the main reason why we’ve been underweight US small caps since July 2018, a relative trade that is now up close to 20%. Small-cap companies can’t offset rising labor costs with technology as easily as large caps, nor do they have the same access to the record-low cost of capital.

Finally, the rising regulatory and cyber costs over the past decade favor larger-cap companies, who can spread such costs across a larger revenue base. Against this backdrop, it should come as no surprise that new business formation is still well below pre-crisis levels. In short, the big get bigger as they continue to eat the small guy’s lunch. To me, this is unsustainable and potentially a bigger risk to the economy and markets than the very important issue of individual income inequality.

Markets understand this dynamic, which is why small caps have underperformed so significantly over the past 18 months and, quite frankly, over this entire cycle. But this phenomenon is manifesting itself in other ways. Capital concentration is following corporate inequality like never before. Currently, the top five companies in the S&P 500 (the other 1 percenters) make up 18% of the total market cap.

A ratio like this is unprecedented, including during the tech bubble. During 2019, the net income concentration for the 1 percenters didn’t keep pace with their market cap concentration, similar to what happened during the 1999 concentration peak.

I think this divergence is the result of the extraordinary liquidity being provided by the world’s central banks, which is flowing to the most liquid and largest names in the S&P 500. This also recalls 1999, when the Fed expanded its balance sheet at the end of the year and early in 2000 as a precaution against Y2K disruption.

The bottom line: this income/market cap divergence looks likely to continue over the near term, given the Fed’s expected balance sheet expansion through April. More importantly, if we’re right, these companies will then need to deliver on the income side of the inequality divide or risk a sharp decline in price.

When late last week President Trump first referenced a Soleimani-directed plot to “blow up” the US embassy in Baghdad, which during a Friday Fox interview became in the president’s words “I believe it would’ve been four embassies” — senators which had been given a classified briefing Wednesday balked, saying no such intelligence was referenced but should have been if there was evidence.

And now no less than Secretary of Defense Mark Esper appears to have publicly contradicted the White House’s rationale for taking out the “imminent” threat of Qasem Soleimani. Esper told CBS’ Face the Nation on Sunday that he “didn’t see” specific evidence for embassy attacks, while adding that he still believes such an attack was likely.

Defense Secretary Epser: “I didn’t see” specific evidence that showed Iran planned to strike four U.S. embassies. pic.twitter.com/4j2GgIIirL

— Kyle Griffin (@kylegriffin1) January 12, 2020

“The president didn’t cite a specific piece of evidence. What he said was he believed,” Esper said. 

“What the president said was that there probably could be additional attacks against embassies. I shared that view,” Esper said. “The president didn’t cite a specific piece of evidence.”

When pressed on whether intelligence officers offered concrete evidence on that point he said: “I didn’t see one with regards to four embassies.” — Reuters

During a separate CNN interview on Sunday, the Pentagon chief continued to awkwardly dance around the question of whether specific intelligence showed such an attack was being planned. Esper described that Trump merely “believed” it to be the case, while refusing to confirm any particular intelligence. 

But earlier statements of Secretary of State Mike Pompeo, who before reporters defended Trump’s assertion about the IRGC targeting the embassies, suggested there was specific intelligence. 

When Pompeo was pressed on Friday by reporters over the nature of the “imminent threat” claims, he said: “We had specific information on an imminent threat and that threat stream included attacks on U.S. embassies. Period. Full stop.” And asked about what made it imminent, Pompeo simply said: “It was going to happen.”

The #Trump lie about intelligence for the #Soleimani hit has now completely disintegrated. Esper admits he never saw intelligence show a threat to U.S. Embassies, but “shared the president’s view that probably…they were going to go after our embassies.” https://t.co/SFVTnEcnyF

— Gareth Porter (@GarethPorter) January 12, 2020

At first it was unclear whether President Trump was claiming to have seen specific intelligence outlining such a threat, or perhaps was just speaking generally and in his usual hyperbolic style (“blow up” the embassy) of the pro-Iranian mob’s actions besieging the US embassy in Baghdad days prior to the Soleimani assassination.

The demonstrators had been filmed setting the outer walls of the compound on fire during the chaotic events nearly two weeks ago which resulted in a contingent of Marines rapidly deploying from Kuwait to bolster embassy security. 

Let’s be clear – if there was evidence of imminent attacks on four embassies, the Administration would have said so at our Wednesday briefing. They didn’t.

So either Fox News gets higher level briefings than Congress…

or…wait for it…

there was no such imminent threat.

— Chris Murphy (@ChrisMurphyCT) January 10, 2020

So now Esper appears to be saying it was Trump’s personal belief, while Pompeo appeared to base it on “specific information” — in other words direct intelligence. But which is it?

It can’t be both ways. 

Like the Bush administration’s famously evolving rationale for the war in Iraq, are we witnessing the narrative on Iran made up on the fly?